Rajoy Seeks European Backing as Spain’s Access Narrows

By Emma Ross-Thomas and Charles Penty -
May 28, 2012

Spanish Prime Minister Mariano Rajoy
called for a show of force from European authorities as his
government sought ways to avoid tapping markets to fund the
bailout of the nation’s third-biggest lender.

“Europe has to dissipate any doubts about the euro,” the
premier told a hastily called news conference in Madrid
yesterday. It “must affirm that the euro is an irreversible
project and act in consequence,” he said.

Spain is trying to shore up its banks and help cash-
strapped regions while its own borrowing costs compared with
Germany’s are the highest since the creation of the euro. As
Spain’s narrowing market access depends on domestic lenders
financed by the European Central Bank, the government is
considering using public-debt securities rather than cash to
fund the 19 billion-euro ($24 billion) bailout of BFA-Bankia.

“The truth is that Spain can’t do this on its own -- it
can’t afford to bail out or recapitalize its banking system,”
Olly Burrows, a credit analyst at Rabobank International in
London, said by phone. “Spain itself doesn’t need a bailout --
this has always been about the Spanish banks, but it’s also true
that you can’t borrow money from someone who doesn’t have it.”

Rajoy repeated yesterday that he wouldn’t seek a European
rescue for the nation’s banks. Still, he said the European
Stability Mechanism, which is due to start operating as a
permanent rescue fund in July, should be able to recapitalize
struggling banks directly, bypassing national governments.

European Split

European leaders are split over the issue, an EU official
said on May 22, as the statutes say support must be channeled
through national governments. Rajoy said “a lot of people”
agreed with him, without giving details.

Rajoy also called for help from European authorities to
address the “sustainability” of public debt. He didn’t name
the ECB, as he did on May 23 when he called on the central bank
to support Spanish bonds after a meeting of European leaders.

ECB Executive Board member Jose Manuel Gonzalez-Paramo said
in an interview with Spanish state newswire Efe today that the
government should talk less about what the central bank should
do. The ECB has already shown “largesse” to Spain, which was
the main beneficiary of its decision to offer 1 trillion euros
of three-year loans to banks in December and February, Gonzalez-
Paramo said.

Using public-debt securities instead of cash to bailout
BFA-Bankia (BKIA), the lender Spain nationalized on May 9, may shift
the burden of recapitalizing it to the Frankfurt-based ECB as
banks can use such securities as collateral to get cash from the
central bank. Spanish lenders’ net average borrowings from the
ECB rose to a record 264 billion euros in April, compared with
42 billion euros a year earlier, according to data from the Bank
of Spain.

‘More Orthodox’

“Some might call it creative, some might call it avoiding
the real issue,” Ken Wattret, chief euro-region economist at
BNP Paribas SA in London, said in a telephone interview. “The
ECB probably would favor a more orthodox approach.”

Spain’s bank-rescue fund, which has already committed 18.7
billion euros, equivalent to 1.8 percent of gross domestic
product, to shoring up lenders, has 5 billion euros in cash.
BFA-Bankia, with the biggest Spanish asset base, said on May 25
it would need 19 billion euros to clean up toxic assets and
bolster capital.

Rajoy said the government hadn’t spoken to the ECB on the
matter and the central bank declined to comment on the proposal,
which was confirmed by an Economy Ministry spokesman yesterday.
The premier said the government hadn’t yet decided how it would
recapitalize Bankia.

Euro Record

Rajoy called his unscheduled news conference as the gap
between Spanish and German bond yields widened to as much as 513
basis points, the most since the start of the euro in 1999. The
spread closed at 512 basis points, with 10-year yields at 6.48
percent, 64 basis points higher than before Bankia was
nationalized.

Rajoy said the nationalization had “absolutely not
influenced the risk premium at all,” as he reiterated that
Spain risks being locked out of debt markets if it fails to cut
the budget deficit. He pledged to continue with legislative
changes to strengthen the economy as well as austerity measures.

Foreign investors cut their holdings of Spanish debt to 37
percent of the total in circulation in April from 50 percent at
the end of last year. Domestic lenders, bolstered by emergency
funding from the ECB, have picked up the slack, increasing their
share to 29 percent from 17 percent over the same period. At a
bond auction on May 17, foreigners took 20 percent to 30 percent
of the issue, a government official, who declined to be named,
told reporters.

“The perception is that the government is trying to
deliver the least it considers possible to stabilize confidence,
but in these circumstances you have to deliver much more,”
BNP’s Wattret said. “There’s a sense that the government is
struggling to get a proper grip and there’s a long way to go to
turn around sentiment around.”